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Canada’s economy hums as the eurozone sputters. But is relief a one-quarter wonder?

Canada&rsquo;s economy has been powering ahead, a new outlook from the Royal Bank says, predicting Canada&rsquo;s economy will skirt the global economic turbulence and rebound strongly from a slow start to the year. But experts debate if it will last past one quarter or be dragged down by global troubles.

By By Dana FlavelleBusiness reporter

Tues., June 12, 2012

While the turmoil in the eurozone dominated the headlines in recent months, Canada’s largest bank says it believes the domestic economy continued to power ahead.

Striking a rosier note than most of the banks, RBC said Tuesday it expects Canada’s gross domestic product will grow 3.1 per cent in the quarter that ends June 30, two and a half weeks from now.

For the year, the bank is forecasting more moderate growth of 2.6 per cent as concerns about events in Europe, China and the U.S. continue to cast a shadow over the global economy.

Still, that’s half a percentage point above the consensus forecast and slightly above the Bank of Canada’s call for 2.4 per cent growth in 2012.

“We’re relatively bullish,” RBC chief economist Craig Wright agreed. “On balance, conditions for growth are positive, supported by a continuation of a low interest rate environment and a Canadian financial sector that is healthy and ready to provide credit.”

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The forecast comes amid ongoing concerns about the debt crisis in Europe, an economic slowdown in China, and the end of fiscal stimulus in the U.S. later this year.

Without dismissing those issues, RBC’s Wright said he believes policy makers will engineer a soft landing for China’s economy, while the U.S. will continue to grow at a moderate pace.

“We’re more worried about the eurozone…We’d like to see them get in front of the crisis. That’s not happening yet. We’re still holding out hope,” Wright said in an interview with The Star.

The eurozone remained in turmoil Tuesday as investors feared a $100 billion euro ($125 million U.S.) bailout of Spain may not be enough to shore up its banks against falling real estate values.

Investors pushed the borrowing costs on 10-year Spanish bonds back up on concerns about holding its debt. Meanwhile, Italian Premier Mario Monti insisted Italy won’t be next on the rescue list.

And debt-laden Greece is set to hold new elections Sunday that could determine whether it leaves the 17-member eurozone if new leaders refuse to meet the rest of the region’s demands for austerity.

The ongoing uncertainty has sent Canada’s stock market on a roller coaster ride. The S&P/TSX composite index closed down 0.84 per cent Tuesday at 11,497.30 points, though it has rebounded from earlier lows and is now down just 3.83 per cent on the year.

Canada’s economy hasn’t escaped totally unscathed, according to the Conference Board of Canada.

The board’s May index on industry profitability found 13 of 49 industries reporting profits declined. Several that had been posting strong increases at the beginning of the year are now showing a slowdown.

“The weaker profitability outlook is linked to the ongoing European debt crisis,” the Ottawa-based think-tank said, adding that slowing growth in emerging markets and depressed prices for the kind of commodities Canada exports were also factors.

While RBC’s forecast is more optimistic than other banks, there’s general agreement on the reasons the second quarter will look stronger than the first.

The economy is playing catch up.

Much of Canada’s weaker than expected 1.9 per cent first quarter growth rate was due to one-time domestic events. Mild weather hurt demand for utilities. Temporary production problems hurt growth in mining and energy.

Since then, hiring in March and April has accelerated at a blistering pace with 140,000 new jobs, economists noted.

On the other hand, hiring softened in May and combined with slower housing starts and consumer credit growth, all signs point to more modest growth for second half of the year, noted CIBC economist Emanuella Enenajor.

CIBC is forecasting growth of 2.7 per cent for this quarter and 2.1 per cent for the year. “Our outlook is perhaps more tame than some of the others,” Enenajor said.

“This could be a one-quarter wonder,” said CIBC chief economist Avery Shenfeld. The bank is predicting 2.7 per cent growth for the second quarter and just under 2 per cent for the second half of the year, he said.

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